Ed Lester, chief executive of the Student Loans Company, was paid through a private firm he had established rather than being paid direct – a tax avoidance mechanism which could reduce his income tax liability by £40,000 a year.

The disclosure threatens to undermine Coalition pledges to crack down on tax avoidance in the private sector and opens ministers up to accusations of double standards.

Last night Mr Alexander said: “I have asked Treasury officials to urgently review the appropriateness of allowing public sector appointees to be paid through an agency by a personal service company.

"I have also written to my cabinet colleagues asking them to carry out an urgent internal audit to ensure that all senior consultancy appointments provide value for money. As I have said before, I believe everybody should pay the right tax at the right time and that it is why I’ve taken this action.”

Mr Lester, a former chief executive of NHS Direct, was hired as interim chief executive in May 2010 before the deal was made permanent in December 2010. His two year contract runs from 1 February 2011 to 31 January 2013.

He is paid a basic salary of £140,000 a year, and can qualify annually for a £14,000 bonus and a cash pension contribution of £28,000, taking his total pay to £182,000, via the head-hunter which placed him with the Student Loans Company.

However the sums are paid to a private company he owns, rather than to him personally as if he were an employee.

This allows Mr Lester to pay corporation tax of 21 per cent, rather than up to 50 per cent, income tax on his earnings. Mr Lester’s pay arrangements are estimated by accountants to have saved him £40,000 a year, according to Newsnight.

Mr Lester, who lives in Buckinghamshire, also receives £550 a week to pay for his travel and living expenses and cover his costs of getting to the company’s offices in Glasgow.

In emails, letter and memos one civil servant at the Department for Business, Innovation and Skills described the arrangement as “tax efficient” for Mr Lester.

Last night Conservative MP Richard Bacon, a member of the Public Accounts Committee, wrote to the Prime Minister David Cameron, expressing concern that the arrangements "appear to have been approved" by HM Revenue and Customs.

He said: "It appears that the government expended some considerable effort to find a “tax efficient” arrangement for Mr Lester.

"Indeed, the advice to the government from a leading accountancy firm, KPMG, as to the suitability of the proposed arrangements for Mr Lester was laid aside when it was found to be unhelpful."

It appears that the government expended some considerable effort to find a “tax efficient” arrangement for Mr Lester. Indeed, the advice to the government from a leading accountancy firm, KPMG, as to the suitability of the proposed arrangements for Mr Lester was laid aside when it was found to be unhelpful.

The news is embarrassing for Mr Alexander, because last week he had boasted to MPs in the House of Commons that he had personally cut over £1million from the salaries of top officials in Government.

Mr Alexander has now written to all Government departments demanding to know whether other public sector workers were paid the same way.

Mr Alexander’s spokesman insisted he had not been aware of “any potential tax benefit”, insisting that Mr Lester’s terms were agreed by the Department for Business.

He said: “Terms and conditions are negotiated by the appointing department, and presented to the Chief Secretary for approval of the salary level.

“The Chief Secretary approved the overall pay, at a reduced rate and in a continuation of the interim arrangements previously agreed. The Chief Secretary was not made aware of any potential tax benefit to an individual."

In addition he had also asked civil servants “to carry out an urgent internal audit to ensure that all senior consultancy appointments provide value for money in this regard. This will be completed by the end of March 2012”.

The spokesman added: “If any appointments are found which do not provide value for money, then the department should seek to unwind them as quickly as possible, in line with securing good value for money.”

Mr Lester was unavailable for comment. A spokesman for the Student Loans Company said Mr Lester’s pay deal was cheaper for the taxpayer than when he had originally been hired on an interim basis.

The company had “followed all government guidelines on the appointment and remuneration” of Mr Lester.

A Business, Innovation and Skills spokesman added: “The Department adopted the correct processes and was satisfied it had come up with a package that met the relevant guidelines including value for money.

“Terms and conditions were negotiated by the SLC and BIS, and presented to the Chief Secretary of the Treasury for approval of the salary level. Details of the arrangements were transparent throughout, including through published accounts.”